Make a Personal Finance Plan

The best way you can motivate yourself to prepare for your financial future by saving and investing is to create a personal finance plan. This type of plan allows you to prepare for expenses by making sure you have enough money saved to pay for them as well as allocating money for short-term and long-term savings and investments. Here are the basics to creating a personal finance plan.

Assess Your Financial Situation

The first step to creating a plan is determining where you stand financially. Figure out your net worth. The whole process shouldn't take more than 20 minutes and will involve adding your assets and subtracting your liabilities from the assets.

List your largest assets (home, car, etc) first as well as their dollar amount. List your liquid assets which are account balances, retirement accounts and cash. List any personal assets (jewelry, heirlooms, coins etc) worth more than $500 each. Do not inflate any of the numbers to try to increase the value of your assets. Add the total together to calculate the value of your assets.

Figure out your liabilities beginning by listing the largest including your mortgage and any loans. List any other debt you may owe including credit cards. Add the total together and subtract the number from your assets to determine your net worth. It can be large or small or even in the negative number. Ideally the larger the number the better, but you need a starting point.

Calculate Debt-to-Income Ratio

This is similar to determining your net worth by calculating the total of your liabilities. Figure out your monthly debt obligations including child support, mortgage, and credit card and loan payments. Add the total. Then add the total of your monthly income. Divide the total debt by the total monthly income to get the percentage of debt. Ideally front ratio should be less than 36 percent and your back debt ratio of 28 percent or less. If the numbers are higher, consider debt reduction as one of your most important future financial goals.

Determine Future Financial Goals

Create reasonable goals for yourself. They can be as short as one year or as long as five. It's okay to have different goals over different periods of time. Goals can be anything like paying off a credit card, buying a new vehicle or saving for a house down payment. Don't forget to add creating an emergency fund as part of your goals.

Constantly evaluate your process at least twice a year to re-evaluate your approach and make changes as necessary.

Design and Implement Your Plan

It doesn't matter how little or how much you make, you need to create a budget that addresses your financial goals. It may be necessary to take on another job to increase income or to cut unnecessary expenses. Carefully track income and expenses and make adjustments to your plan as necessary.